H.R. 9: The Small Business Tax Cut Act

The act provides a deduction up to 20 percent for qualified business income for certain U.S. businesses, limited to 50 percent of wages paid. Only businesses with fewer than 500 full-time equivalent employees are eligible for the deduction. For a complete description of the bill, see Joint Committee on Taxation report JCX-30-12.

Modeling Assumptions

The distributional estimates are based on the official revenue estimate from the Joint Committee on Taxation (JCT). We allocate the total deduction between C corporations and pass-through entities, and, for pass-through entities, among individuals receiving different forms of pass-through income. We base those allocations on three sources: 1) individual tax return data; 2) data from the Census Bureau’s Statistics of U.S. Businesses (SUSB), a published Treasury report on the shares of business income reported on individual income tax returns that come from a qualifying trade or business, and 3) published IRS data on income of C corporations.We adjust the total deduction amount so that the revenue estimate from the Tax Policy Center (TPC) microsimulation model matches that from JCT.

We base estimates for pass-through entities on individual tax return data in the TPC model. Qualified small business income derives from reported net positive income from sole proprietorships (schedules C and F), partnerships, and S corporations. We make adjustments to exclude income from sole proprietorships that do not report deductions for wages paid and to adjust partnership income for the fraction not attributable to a trade or business.1 We use SUSB data to adjust income amounts for the fraction of business activity in firms with more than 500 employees.2

We base the estimate for C Corporations on published IRS data, adjusted using SUSB data on the fraction of business receipts by C corporations with fewer than 500 employees, and grown to 2012 levels. We assume that the tax savings for C corporations benefit capital owners in proportion to their income from capital reported on individual tax returns.

2 We use the enterprise level employment splits from the SUSB, which is based on employment in mid-March. Data by legal form of organization is available for the period 2007-2009, available at http://www.census.gov/econ/susb/index.html.